1. The board of a company provides leadership and strategic guidance, objective judgement independent of management to the company and exercises control over the company, while remaining at all times accountable to the shareholders. The measure of the board is not simply whether it fulfils its legal requirements but more importantly, the board's attitude and the manner it translates its awareness and understanding of its responsibilities. An effective corporate governance system is one, which allows the board to perform these dual functions efficiently. The Board of Directors of a company, thus directs and controls (the management) of a company and is accountable to the shareholders.
   [This is a mandatory recommendation.]

2. The Board directs the company, by formulating and reviewing company's policies, strategies, major plans of action, risk policy, annual budgets and business plans, setting performance objectives, monitoring implementation and corporate performance, and overseeing major capital expenditures, acquisitions and divestitures, change in financial control and compliance with applicable laws, taking into account the interests of stakeholders. It controls the company and its management by laying down the code of conduct, overseeing the process of disclosure and communications, ensuring that appropriate systems for financial control and reporting and monitoring risk are in place, evaluating the performance of management, chief executive, executive directors and providing checks and balances to reduce potential conflict between the specific interests of management and the wider interests of the company and shareholders including misuse of corporate assets and abuse in related party transactions. It is accountable to the shareholders for creating, protecting and enhancing wealth and resources for the company, and reporting to them on the performance in a timely and transparent manner. However, it is not involved in day-to-day management of the company, which is the responsibility of the management.

Composition of the Board of Directors

3. The Committee is of the view that the composition of the board of directors is critical to the independent functioning of the board. There is a significant body of literature on corporate governance, which has guided the composition, structure and responsibilities of the board. The Committee took note of these while framing the recommendations on the structure and composition of the board.

4. Till recently it has been the practice of most of the companies in India to fill the board with representatives of the promoters of the company, and independent directors if chosen were also handpicked thereby ceasing to be independent. This has undergone a change and increasingly the boards comprise of following groups of directors - promoter director, (promoters being defined by the erstwhile Malegam Committee), executive and non executive directors, a part of whom are independent. The composition of the board is important inasmuch as it determines the ability of the board to collectively provide the leadership and ensures that no one individual or a group is able to dominate the board. Among the three classes of directors, the executive directors (like director-finance, director-personnel) are involved in the day to day management of the companies; the non-executive directors bring external and wider perspective and independence to the decision making

Among the non-executive directors are independent directors, who have a key role in the entire mosaic of corporate governance. Independent directors are directors who apart from receiving director's remuneration do not have any material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgement of the board may affect their independence of judgement. Further, all pecuniary relationships or transactions of the non-executive directors should be disclosed in the annual report.

5. The law does not make any distinction between the different categories of directors and all directors are equally and collectively responsible in law for the board's actions and decisions, the Committee is of the view that the non-executive directors bring an independent judgement to bear on board's deliberations especially on issues of strategy, performance, management of conflicts and standards of conduct. The Committee therefore lays emphasis on the calibre of the non-executive directors, especially of the independent directors.

6. Good corporate governance dictates that the board be comprised of individuals with certain personal characteristics and core competencies such as recognition of the importance of the board's tasks, integrity, a sense of accountability, track record of achievements, and the ability to ask tough questions. Besides, having financial literacy, experience, leadership qualities and the ability to think strategically, the directors must show significant degree of commitment to the company and devote adequate time for meeting, preparation and attendance.

7. Independence of the board is critical to ensuring that the board fulfils its oversight role objectively and holds the management accountable to the shareholders. The Committee has, therefore, suggested the definition of independence, the structure and composition of the board and of the committees of the board.

8. The Committee recommends that the board of a company have an optimum combination of executive and non-executive directors with fifty percent of the board comprising the non-executive directors. The number of independent directors (independence being as defined in the foregoing paragraphs) would depend on the nature of the chairman of the board. In case of a non-executive chairman, at least one-third of board should comprise of independent directors and in case of an executive chairman, at least half of board should be independent.
   [This is a mandatory recommendation.]

9. The tenure of the directors will be as prescribed in the Companies Act.

Nominee Directors

10. Besides the above categories of directors, there is another set of directors in Indian companies who are the nominees of the financial or investment institutions to safeguard their interest. The nominees of the institutions are often chosen from among the present or retired employees of the institutions or from outside.

11. Committee recognises the pioneering role of financial institutions in the industrial development of the country. However, to avoid potential conflicts of interest, it is desirable that the financial institutions maintain an arm's length relationship with the company by not seeking a seat on the board of a company, which would imply their involvement in the management of the company. Instead they would serve their cause and protect their interests better and provide direction to the individual shareholders if they make more effective and pro-active use of their significant voting power at the General Body meetings. Alternatively they may also decide to dis-invest their holdings in the market which could have an adverse impact on the prices of the stocks. Besides, the investment institutions, by virtue of their position on the board of the company, become privy to unpublished price sensitive information. This could easily expose these institutions and their nominees to the charge of insider trading, when these institutions or their nominees deal in the securities of the company. It is also to be noted that by occupying a board seat, implicitly the nominee directors share equal responsibility as any other director on the board of the company

12. The Committee recommends that the financial institutions should have no direct role in managing the company, and should normally not have nominees on the board, merely by virtue of their financial exposure by way of investment in the securities of a company. There is however a case for the term lending institutions to have nominees on the Boards of the borrower companies, to protect their interests as creditors, in case of loan default or a potential of loan default, the determination of which may be left to the judgement of the lending institutions themselves. In such cases, the nominee directors should take an active interest in the activities of the board and have to assume equal responsibility, as any other director in the board.

Chairman of the Board

13. The Committee believes that the role of Chairman is to ensure that the board meetings are conducted in a manner which secures the effective participation of all directors, executive and non-executive alike, and encourages all to make an effective contribution, maintain a balance of power in the board, make certain that all directors receive adequate information, well in time and that the executive directors look beyond their executive duties and accept full share of the responsibilities of governance. The Committee is of the view that the Chairman's role in principle be different from that of the chief executive

14. Given the importance of Chairman's role, the Committee recommends that a non-executive Chairman should be entitled to maintain a Chairman's office at the company's expense and also allowed reimbursement of expenses incurred in performance of his duties. This will enable him to discharge the responsibilities effectively.
    [This is a mandatory recommendation.]

15. The measure of the board is buttressed by the structures and procedures of the board. The various committees of the board recommended in this report would enable the board to have an appropriate structure to assist it in the discharge of its responsibilities. These need to be supplemented by certain basic procedural requirements in terms of frequency of meetings, the availability of timely information, sufficient period of notice for the board meeting as well as circulation of agenda items well in advance, and more importantly, the commitment of the members of the board.

16. The Committee therefore recommends that board meetings should be held at least four times in a year, with a maximum time gap of four months between any two meetings. The minimum information as given in Annexure3 should be available to the board.
    [This is a mandatory recommendation.]

17. Committee further recommends that to ensure that the members of the board give due importance and commitment to the meetings of the board and its committees, there should be a ceiling on the maximum number of committees across all companies in which a director could be a member or act as chairman. The Committee recommends that a director should not be a member in more than 10 committees or act as chairman of more than five committees across all companies in which he is a director
    [This is a mandatory recommendation.]

18. The Committee was of the view that a company must have a credible and transparent policy in determining and accounting for the remuneration of the directors. The policy should avoid potential conflicts of interest between the shareholders, the directors, and the management. The overriding principle in respect of directors' remuneration is that of openness and shareholders are entitled to a full and clear statement of benefits available to the directors.

19. For this purpose the Committee recommends that the board should set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company's policy on specific remuneration packages for executive directors including pension rights and any compensation payment.
    [This is a mandatory recommendation.]

The Committee however recognised that the remuneration package should be good enough to attract, retain and motivate the Directors of the quality required, but not more than necessary for the purpose. The remuneration committee should be in a position to bring about objectivity in determining the remuneration package while striking a balance between the interest of the company and the shareholders.

20. The Committee recommends that to avoid conflicts of interest, the remuneration committee, which would determine the remuneration packages of the executive directors should comprise minimum of three non-executive directors, the chairman of committee being an independent director.

21. The Committee deliberated on the quorum for the meeting and was of the view that remuneration is mostly fixed annually or after specified periods. It would not be necessary for the committee to meet very often. The Committee was of the view that it should not be difficult to arrange for a date to suit the convenience of all the members of the committee. The Committee therefore recommends that all the members of the remuneration committee should be present at the meeting.

22. The Committee also recommends that the Chairman of remuneration committee should be present at Annual General Meeting, to answer the shareholder queries.

23. The Committee recommends that the remuneration of non-executive directors should be decided by the entire board of directors.

24. The Committee further recommends that the recommendations of the board of directors would need to be ratified at the General Body meeting of shareholders and in case the board disagrees with the recommendations of the remuneration committee, the matter should be decided at the General body meeting of the shareholders who should be provided with sufficient information about the remuneration policy and package.
    [All the above recommendations in paragraphs 7.3 to 7.7 are mandatory]

Disclosures of Remuneration Package

25. is important for the shareholders to be informed of the remuneration of the directors of the company. The Committee therefore recommends that the following disclosures should be made in the section on corporate governance of the annual report:

    • All elements of remuneration package of all the directors i.e. salary, benefits, bonuses, stock options, pension etc.

    • Details of fixed component and performance linked incentives, along with the performance criteria.

    • Service contracts, notice period, severance fees.

    • Stock option details, if any - and whether issued at a discount as well as the period over which accrued and over which exercisable
      [This recommendation is mandatory ]